"Trust is Dead" declares credit crisis expert panel

Financial experts share analysis of economic meltdown.

There are plenty of factors that went into the current global credit crisis, but at the center of it all may be a simple axiom: “Transactions require trust, and trust is dead,” said Margaret Forster, Finance associate professional specialist at the University of Notre Dame.

Forster and three other financial experts from Notre Dame presented “The Credit Crisis: What It Means for You and the World” on Oct. 13 in the Mendoza College of Business Jordan Auditorium. The event was intended to provide some analysis of the dramatic stock downturns and bank failures convulsing Wall Street, even on a day that saw the Dow Jones Industrial Average surge more than 900 points after plunging to historic lows in the week before.

“This crisis will touch everyone, and yet so much is unclear,” said Richard Mendenhall, Notre Dame professor and Duda Chair of the Finance department, which sponsored the event. The discussion was open to the public.

Among the issues discussed by the panelists were how falling real estate values contributed to the banking crisis, whether the government bailout was necessary, and what the next steps are likely to be. The event was moderated by Finance Associate Professor Katherine Spiess and included an extensive question-and-answer period after the panelists made their presentations.

Forster explained how some critical changes in the way mortgages are handled lead to a much looser lending policy, which ultimately made for disaster in the mortgage security market once real estate prices started to slide. “Many things went wrong, but I’m going to argue it started with one thing – when housing prices declined.” With price falling, those holding sub-prime loans could not refinance, which meant an increase in foreclosures. The market then saw a cascading effect, where those holding securitized sub-prime debt realized that the value of those securities was unknown and ownership uncertain. Soon, institutions stopped trusting any collateral but the U.S. Treasury, which shut out a large number of would-be borrowers, effectively freezing credit.

Finance Professor Tom Cosimano described how the default rate primarily in the sub-prime market led to problems of liquidity in the capital markets, which eventually snowballed into a stock market drop of $8 trillion. Looking ahead, one of the looming problems will be arriving at a fair evaluation of the assets of financial institutions and trusts, he said. “Somebody has to step in and look at the books of these companies and establish that they are trustworthy, that these mortgages and assets are worth something,” said Cosimano. “The traditional way they solve this problem is through a clearinghouse, which is effectively the Federal Reserve System and now the European Central Banks.”

Panelist Nelson Mark, professor of International Economics, compared what is happening in the United States to previous crises in other parts of the world, such as Sweden and Japan, as well as the 1929 Great Depression. He also analyzed the $700 billion bailout package. “Lots of people are against the bailout, but I think since we’ve started along this path, some sort of bailout needs to be engineered,” he said.

John Rosenthal, CEO of the Northern Indiana Region of Old National Bancorp and former CEO of St. Joseph Capital Corp., said one fallout of the crisis is a lot of blame shifting, with bankers now considered villainous by some. But he pointed out that there were many players in the chain of events leading up to the meltdown, the overextended consumer to the easy money policies, to Congress increasing the amount of sub-prime loans sponsored by Fannie Mae and Freddie Mac. Ultimately, he sounded a positive note, encouraging audience members not to panic. “We are still the wealthiest country in the world. We have so many blessings, so one of the things I think we should do is to thank God for our blessings.”